What is EBITDA? Understand Cash Flow Reality in 3 Mins

In the world of investment analysis, "EBITDA" (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a commonly referenced financial metric. It helps investors quickly assess a company's operational performance, particularly when comparing companies across different industries or countries, as EBITDA provides a relatively neutral benchmark.

What Is EBITDA？

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) refers to corporate earnings before deducting interest, taxes, depreciation, and amortization. It serves as a key metric measuring "core operating cash flow," applicable for cash flow assessment in high capital expenditure industries (e.g., semiconductors, shipping), enterprise acquisition valuation (commonly using EV/EBITDA multiples), and avoiding profit manipulation pitfalls through depreciation policies.

Advantages of EBITDA

The key advantages of this metric are:

●    Excludes non-operational items: Such as interest and taxes, enabling EBITDA to purely reflect a company's operational performance.

●    Eliminates non-cash expense impacts: Depreciation and amortization affect net profit but involve no actual cash outflow.

EBITDA removes distortions from "financing structures," "tax regime differences," and "non-cash expenses," directly targeting core operational efficiency. Thus, it's widely used to evaluate operational effectiveness, especially in cross-company comparisons.

How to Calculate EBITDA?

EBITDA Calculation Formula as below:

EBITDA = Net Profit + Interest Expenses + Taxes + Depreciation + Amortization

For example: A company's 2024 net profit is TWD 100 million, interest expenses TWD 20 million, taxes TWD 15 million, depreciation and amortization TWD 30 million. Its EBITDA equals:

100 million + 20 million + 15 million + 30 million = TWD 165 million

This figure provides investors a reference point for evaluating corporate operational performance.

EBITDA vs Free Cash Flow, Net Profit: Which to Prioritize in Financial Analysis?

In financial analysis, EBITDA, Free Cash Flow (FCF), and Net Profit each serve distinct purposes.

EBITDA, Free Cash Flow (FCF), Net Income Comparison

Brief Summary:

●    EBITDA: Provides a "rough outline" of operational efficiency but ignores actual cash flow pressures. Suitable for preliminary valuation and rapid comparisons.

●    Free Cash Flow: Shows actual usable cash after capital expenditures, truly reflecting "cash remaining in company coffers." Better indicates solvency and future growth potential. Ideal for in-depth financial health analysis.

●    Net Profit: Earnings after all expenses, highly affected by accounting policies.

These metrics each hold value but shouldn't be used alone. When conducting corporate analysis or trading strategy planning, combine them for comprehensive financial insights.

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EV/EBITDA Multiple Valuation: How Investors Use It for Stock Selection?

EV/EBITDA is the ratio of Enterprise Value (EV) to EBITDA, used to assess corporate valuation levels.

Calculation Formula:

EV/EBITDA = Enterprise Value ÷ EBITDA

A lower multiple typically indicates potential undervaluation; conversely, a higher multiple suggests possible overvaluation. Investors leverage this metric to evaluate whether a company is undervalued or overvalued. This indicator eliminates distortions from capital structure & accounting policies, making it suitable for cross-industry comparisons. Lower multiples signal relatively cheaper companies with potential investment value, particularly for identifying stable operations or transformative growth stocks.

According to data, EV/EBITDA multiples across industries are as follows:

●    Construction: 2.5 - 6x

●    Cybersecurity: 4.9 - 11.1x

●    Biotechnology: 6.2 - 11.6x

These figures serve as references for investor cross-industry comparisons.

EBITDA Margin: Measuring Corporate Profitability

EBITDA Margin is the ratio of EBITDA to revenue, calculated as:

EBITDA Margin = EBITDA ÷ Revenue

A higher ratio indicates better operational efficiency.

For example: A tech company's 2024 revenue is TWD 500 million, EBITDA TWD 100 million. Its EBITDA Margin equals:

100 million ÷ 500 million = 20%

This indicates good operational profitability.

EBITDA Applicability and Limitations Across Industries

EBITDA's relevance varies by industry:

●    Capital-intensive industries: such as manufacturing and energy. High capital expenditures mean EBITDA may not fully reflect financial health.

●    Asset-light industries: such as technology and services. EBITDA more accurately measures operational efficiency.

Thus, when using EBITDA for valuation, investors should consider sector characteristics and integrate other financial metrics for holistic analysis.

EBITDA Controversies

Renowned investor Buffett expressed reservations about EBITDA. He argued that EBITDA overlooks capital expenditures and debt burdens, potentially leading to misjudgment of a company's financial health.

Buffett noted that depreciation and amortization represent costs for maintaining equipment and asset operations, costs that shouldn't be ignored.

Therefore, when using EBITDA for valuation, investors should combine it with other metrics like Free Cash Flow and Net Profit for comprehensive analysis.

Frequently Asked Questions (FAQ)

1. What's the Difference Between EBITDA and Net Profit?

EBITDA reflects operational performance by excluding interest, taxes, depreciation, and amortization, emphasizing "core operational capability."; net profit represents final earnings, affected by capital structure, tax rates, and non-cash expenses. Simply put, EBITDA focuses on "operations," net profit on "overall performance."

2. Why is EV/EBITDA Common for Business Valuation?

EV/EBITDA (Enterprise Value Multiple) eliminates capital structure distortions, enabling cross-industry/company comparisons. Unlike P/E ratios, it better reflects operational efficiency and capital returns—especially for asset-intensive sectors (e.g., telecom, industrials, energy).

3. Which Industries Use EBITDA Most Frequently?

EBITDA is prevalent in high CAPEX/high D&A sectors: telecom, infrastructure, heavy industry, energy, and private equity targets. Tech/startups also reference EBITDA but pair it with cash flow and growth metrics.

4. Does EBITDA Have Limitations?

Yes. EBITDA ignores interest, taxes, and CAPEX, failing to reflect true cash flow. Companies may also use it to window-dress financial reports. Investors should combine it with Free Cash Flow (FCF), debt ratios, and ROIC to avoid skewed analysis.

5. Where Can I Access EBITDA Data?

Calculate manually from financial statements (income + cash flow statements) or use tools on platforms like Bloomberg, TradingView, or Ultima Markets.

Conclusion

EBITDA serves as a crucial metric for evaluating corporate operational performance, providing valuable reference for investors. However, no single indicator fully reflects a company's financial health. Investors should integrate multiple metrics including Free Cash Flow and Net Profit to establish a comprehensive, robust financial evaluation framework, avoiding blind spots from single-metric reliance.

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